Page 257 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes difference of curve TR and TC will be specified with AB. At this state monopolist will gain maximum
profit, as it is clear with point E of TP curve. This process of determining the price and equilibrium
by monopolist is called Trial and Error method, because in this process by determining different price
monopolist has to predict that at which level it will be at the state of equilibrium means will achieve
maximum profit.

Self Assessment

Multiple choice questions:
5. In the situation of monopoly there is only one .............. .
(a) firm (b) currency (c) cost (d) commodity
6. In the field of monopoly for the entrance of new firm in market there is .............. .
(a) tax (b) restriction (c) prohibition (d) permission
7. In the situation of monopoly, there is no ............... curve.
(a) supply curve (b) cost curve (c) curve (d) supply curve
8. For the commodity during monopoly there is no ............... .
(a) close substitute (b) substitute (c) cost curve (d) none of these

13.5 Marginal Revenue and Marginal Cost Approach
According to this approach, equilibrium will be at place when following two conditions will be fulfilled—
(i) Marginal Revenue (MR) = Marginal cost
(MC) and Test Your Brain
(ii) Marginal Cost (MC) curve intersects to (See Fig. 13.1)
Marginal Revenue (MR) from below.
In this situation monopolist will gain maximum When the difference between TR and TC is
profit. By this analysis, the determination of price maximum then the slope of TR = slope of TC.
and equilibrium will be studied through two The slope of TR is MR and slope of TC is MC. So
durations of time— wherever the differences between TR and TC is
maximum there is MR = MC.
(1) Short Run (2) Long Run

Short Run equilibrium

Short run is that duration of time in which time is so minute that monopoly cannot change tied up
sources such as machinery and plant. Monopolist, with the rise of demand can increase supply by
utilizing more quantity of variable sources and by utilizing the full capacity of tied up sources like
machines. In the same way with the fall in demand monopolist will reduce the quantity of variable
sources and also reduce the complete utilization of tied up sources. A monopolist will be at the state
of equilibrium when it will produce that quantity of goods at which (1) Marginal cost will be equal
to Marginal revenue (MC = MR) (2) MC Curve cuts MR Curve from below. During short run, there
are three situations under the state of equilibrium for monopolist. Monopolist (1) May gain Super
Normal profits (2) May achieve Normal Profits and (3) May have to bear Minimum Loss. These can be
explained with the help of Figs. 13.2 – 13.4.
(1) Super Normal Profits: If under the situation of equilibrium the price of product (AR) determined
by monopolist is more than their average costs (AC) (AR > AC) then monopolist will gain Super
Normal Profits. Monopolist will produce to the level where Marginal cost is equal to Marginal revenue

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